[Good Morning Stock Market] Uncertainty Over Economic Recovery Emerges... US and European Markets Decline, Foreign Selling Likely to Continue

[Asia Economy Reporter Oh Ju-yeon] On the 13th (local time), the US New York Stock Exchange closed lower in response to Federal Reserve (Fed) Chair Jerome Powell's mention of the possibility of a prolonged economic recession. The Dow Jones Industrial Average fell 2.17% to 23,247.97, the S&P 500 dropped 1.75% to 2,820.00, and the Nasdaq fell 1.55% to close at 8,863.17.

Powell's remarks about delayed economic recovery are also expected to impact the domestic stock market. With the US and European markets plunging around 2%, it is explained that foreign investors may continue to sell off in the Korean stock market.

[Image source=Yonhap News]

◆ Seo Sang-young, Kiwoom Securities Researcher = The US stock market declined as Powell's remarks and the International Air Transport Association's announcement highlighted the delay in the pace of economic recovery. Although the market initially rose on Powell's expression of strong policy support intentions, it ultimately focused more on his concerns about the economy. Meanwhile, the decline deepened due to Fitch's announcement the previous day about a surge in credit rating downgrades caused by COVID-19 and the expansion of US-China trade tensions.

Among major indices, the Russell 2000, which reflects investor sentiment, fell another 3.32% following a 3.46% plunge the previous day, indicating growing concerns about the US stock market. Considering that credit risk in US financial and small-to-mid-cap stocks was a major factor in the decline, it is expected that sell-offs will also appear in the Korean stock market.

Amid ongoing US-China disputes over COVID-19 responsibility, the US intelligence agencies' announcement regarding China's hacking attempts related to US vaccine clinical trials adds further strain to US-China tensions. Additionally, Powell's remarks on delayed economic recovery could lead to continued foreign selling, which is negative. Of course, considering that abstracts from the American Society of Clinical Oncology will be released after the US market closes, investor sentiment toward related stocks may be favorable. However, the roughly 2% plunge in US and European markets could weigh on the Korean stock market, making a correction possible.

◆ Lee Eun-taek, KB Securities Researcher = There will be some rotation in the second half of the year. Although we currently recommend reducing exposure to semiconductors, after this lull passes, semiconductors are expected to return to a rally in the second half, while defensive sectors, which currently have overweight positions, will lose momentum. The time to prepare for these changes is mid to late June.

Reviewing this year's performance by style, in terms of market capitalization, the order is 'small-cap > mid-cap > large-cap,' and by style, 'growth stocks > value stocks.' The weakness in large-cap stocks is the first occurrence in about five years since August 2015. The recent weakness in large caps is due to semiconductor sluggishness, healthcare strength, and net foreign selling.

Emerging markets' financial conditions will be challenging, so large-scale foreign capital inflows are unlikely, but some inflows are expected from the second half. The pattern of foreign inflows into the Korean stock market has been closely related to US employment data. US employment is expected to bottom out in May-June and show a gradual recovery, which will provide a positive environment for foreign buying inflows. Generally, foreign buying inflows have led to relative strength in large caps, while foreign selling outflows have caused relative strength in small and mid caps. Therefore, expectations of foreign buying inflows are positive for mega-cap stocks.

The sectors to reduce exposure in rotation are small and mid caps excluding defensive stocks, bio, and tech stocks. Defensive stocks, currently overweight sectors at KB Securities (food & beverage, software), are expected to maintain strength for the time being, but exposure should be reduced once this short-term correction ends. That timing is expected to be around mid-June.

This content was produced with the assistance of AI translation services.